After creating a statewide stir with proposals to tax sugary soda, haircuts, cable TV and countless other goods and services, Gov. David Paterson on Wednesday abandoned his plans to impose $1.3 billion worth of "fun" taxes on New Yorkers.

"Nobody wants to add problems to the citizens of New York," Paterson said. "Nobody likes to tax people."

Instead, Paterson plans to use federal stimulus money to close gaps in the state budget. The governor said he intends to use $1.3 billion in Medicaid, education and flexible funding from Washington to replace revenue the taxes would have generated.

While that's good news for residents, there is a catch: Dozens of new or increased taxes -- including those on beer and wine, car registrations, driver's licenses and fishing -- remain part of Paterson's budget proposal. His original executive budget recommended a total of $4.1 billion in increased taxes and fees; about one-third were eliminated Wednesday.

A proposed hike in the excise tax on beer -- from 11 cents to 24 cents per gallon -- remains a concern for the 815 workers and managers at the Anheuser-Busch brewery in Lysander. Plant manager Steve McCormick said he was "extremely disappointed" that Paterson's budget still includes the tax increase "that will threaten many good-paying jobs."

Paterson first announced the tax hikes in mid-December, when the state faced an estimated $15 billion budget deficit.

"The proposed tax increases ... were only put forward as a last resort when the deficit ballooned to an unprecedented level," Paterson said. "Now that enhanced federal funding is available, our highest priority must be to provide targeted relief to those who need it most during this economic crisis -- average New Yorkers struggling to make ends meet."

Paterson, whose popularity has plummeted in polls in recent months, said the proposed taxes were the No. 1 complaint he heard from residents during town hall meetings statewide.

A majority of legislators said they supported Paterson's new plan, and both Senate Majority Leader Malcolm Smith and Assembly Speaker Sheldon Silver signed on.

But some Republican lawmakers questioned what they called Paterson's "mixed messages." As recently as last month, Paterson warned that federal stimulus aid shouldn't derail the state's efforts to reverse years of overspending. The governor also criticized the culture of Albany that allows lawmakers to cover revenue shortages with one-time funds.

Federal stimulus money will dry up in 2011.

"All it's going to do is postpone the inevitable two years from now," said Assemblyman Brian Kolb, R-Canandaigua. "It should be about creating jobs, not plugging spending. We have to look at other ways to reduce spending, not supplant it with stimulus funding."

The state currently faces a $14 billion budget gap, and Paterson admitted Wednesday that the deficit could grow.

"This situation could actually get worse," he said. "But for the time being, we have federal stimulus money, and the reason we'd like to put the money back in the hands of New Yorkers is so that they'll spend it."

The Healthcare Association of New York State objected to the governor's latest plan, saying that federal Medicaid money should be used to resolve health care issues in the budget before it is used to avoid tax increases.

"Things will get terribly worse across the state if we fail to first stabilize the health care system with these federal dollars," said Daniel Sisto, the association's president.

Assemblyman Will Barclay, R-Pulaski, said the Executive Budget still includes several hospital assessments and surcharges on doctors.

"There are still many more taxes and fees that could come out of the proposed budget, given the windfall of money we've received from the federal stimulus package," Barclay said.

State officials said negotiations will continue. The Legislature still has almost three weeks to come up with a balanced, on-time budget. Their deadline is April 1.

"This is by no means the end," Smith said. "We have more work to do. But this is a way of letting the public know they have input on the process and we are listening."